NUR204 Week 7 Assignment Page 1 ` Assi.docx

NUR204: Week 7 Assignment Page 1
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Assignment: Leadership
Assignment Overview
In this assignment, you will research and locate a current
journal article on nursing leadership styles.
The article must be from a professional, peer-reviewed nursing
journal published within the last 5
years; and then write a summary of your findings.
Assignment Details:
Perform the following tasks:
ractive lesson
before attempting this
assignment.
styles. The article must be from a
professional, peer-reviewed nursing journal published within
the last 5 years.
-2 page summary of your findings following the
criteria below:

o First paragraph: summarize the major points of the article.
o Second paragraph: answer whether you support the leadership
style, and why or
why not.
o Final paragraph: discuss the article as it relates to nursing
practice.
o Use at least one additional outside source, such as your
textbook.
o The summary should be written in APA style format and all
sources must be
cited correctly.
NUR204_wk7_assn_jsmith_mmddyyy.
Grading:
Criteria Excellent (3pts) Good (2pts) Needs Improvement
(1pt)
Pts.
Article - Citation from a
professional
peer-reviewed
nursing journal.
- Current within last 5
years
- Relates to nursing
leadership.
- Citation from nursing
journal.

- Out of date or
- Not related to nursing
leadership
- Citation not from a
nursing journal
- Article out of date or
not related to nursing
leadership.
First Paragraph - Concise summary of
key points of article.
- Writing is clear and
focused.
- Details are present.
- Concise summary of
key points.
- Writing is not clear or
focused.
- Some details present.
- Summary is not
concise.
- Writing is not clear or
focused.
- Details are missing.
Second Paragraph - Writing presents
support or non-support
of leadership style.
- Writing explains why
support or non-support
is given.

- Writing is clear and
logical.
- Writing presents
support or non-support.
- Writing does not
express reason for
support or non-
support.
- Writing is somewhat
unclear or not logical.
- Writing does not
present support or non-
support.
- Writing does not
express reason for
support or non-
support.
- Writing is unclear
and illogical.
NUR204: Week 7 Assignment Page 2
`
Third Paragraph - Writing is related to
nursing practice and
demonstrates analysis
and application.
- Writing is related to
nursing practice.

- Analysis and
application is weak.
- Writing is not related
to nursing practice.
- Missing analysis and
application.
Spelling/grammar/
APA
- Proper APA format is
used for citations.
- At least two sources
are included.
- Spelling and grammar
errors are few and
insignificant.
- Proper APA format is
used for citations.
- Only one source is
used.
- Occasional errors in
spelling and grammar.
- APA format is not
used.
- Sources are missing.
- Significant errors in
spelling and grammar.
Written communication
is non-coherent.

Instructor: Total score
Accrual Accounting Concepts
Kimmel ● Weygandt ● Kieso
Accounting, Sixth Edition
4
4-‹#›
Prepare adjusting entries for deferrals.
CHAPTER OUTLINE
Explain the accrual basis of accounting and the reasons for
adjusting entries.
1
2
LEARNING OBJECTIVES
Prepare adjusting entries for accruals.
3
Prepare an adjusted trial balance and closing entries.
4
4-‹#›
LEARNING OBJECTIVE
Explain the accrual basis of accounting and the reasons for

adjusting entries.
1
LO 1
Generally a month, a quarter, or a year.
Fiscal year vs. calendar year.
Accountants divide the economic life of a business into
artificial time periods (Periodicity Assumption).
Jan.
Feb.
Mar.
Apr.
Dec.
. . . . .
▼ HELPFUL HINT
An accounting time period that is one year long is called a
fiscal year.
4-‹#›
Periodicity Assumption
Review Question
What is the periodicity assumption?

Companies should recognize revenue in the accounting period in
which it is earned.
Companies should match expenses with revenues.
The economic life of a business can be divided into artificial
time periods.
The fiscal year should correspond with the calendar year.
LO 1
4-‹#›
Companies recognize revenue in the accounting period in which
the performance obligation is satisfied.
REVENUE RECOGNITION PRINCIPLE
LO 1
4-‹#›
TEACHING TIP
Service businesses recognize revenue when the services are
performed, although many customers may have been billed for
the services (on account). The cash has not been received;
however, the services have been performed. Therefore, revenue
should be recognized.
Illustration: Assume Conrad Dry Cleaners cleans clothing on
June 30, but customers do not claim and pay for their clothes
until the first week of July. The journal entries for June and
July would be:
REVENUE RECOGNITION PRINCIPLE

LO 1
4-‹#›
“Let the expenses follow the revenues.”
ILLUSTRATION 4-1
EXPENSE RECOGNITION PRINCIPLE
LO 1
4-‹#›
ILLUSTRATION 4-1
GAAP relationships in revenue and expense recognition
EXPENSE RECOGNITION PRINCIPLE
LO 1
4-‹#›
INVESTOR INSIGHT
Reporting Revenue Accurately
The Until recently, electronics manufacturer Apple was required
to spread the revenues from iPhone sales over the two-year
period following the sale of the phone. Accounting standards
required this because Apple was obligated to provide software
updates after the phone was sold. Since Apple had service
obligations after the initial date of sale, it was forced to spread

the revenue over a two-year period. As a result, the rapid
growth of iPhone sales was not fully reflected in the revenue
amounts reported in Apple’s income statement. A new
accounting standard now enables Apple to report much more of
its iPhone revenue at the point of sale. It was estimated that
under the new rule revenues would have been about 17% higher
and earnings per share almost 50% higher.
Apple Inc.
LO 1
4-‹#›
Accrual-Basis Accounting
Transactions recorded in the periods in which the events occur.
Revenues are recognized when services performed, even if cash
was not received.
Expenses are recognized when incurred, even if cash was not
paid.
ACCRUAL VERSUS CASH BASIS
LO 1
4-‹#›
Cash-Basis Accounting
Revenues are recognized only when cash is received.
Expenses are recognized only when cash is paid.
Not in accordance with generally accepted accounting
principles (GAAP).
LO 1

4-‹#›
TEACHING TIP
Explain to students that many businesses use the cash basis of
accounting. These businesses outgrow the method when
accounts receivable and accounts payable become substantial.
Also, if the businesses need audited financial statements, they
must comply with GAAP and use the accrual basis. Remind
them that companies can use the cash method and that its use
does not mean that income is being manipulated. Without this
discussion, some students may unfairly criticize an employer,
relative or friend who is using the cash basis of accounting.
2016
2017
Illustration: Suppose that Fresh Colors paints a large building
in 2016. In 2016, it incurs and pays total expenses (salaries and
paint costs) of $50,000. It bills the customer $80,000, but does
not receive payment until 2017.
ILLUSTRATION 4-2
Accrual-versus cash-basis accounting
LO 1
4-‹#›
Periodicity Assumption

Review Question
Which one of these statements about the accrual basis of
accounting is false?
Companies record events that change their financial statements
in the period in which events occur, even if cash was not
exchanged.
Companies recognize revenue in the period in which the
performance obligation is satisfied.
This basis is in accord with generally accepted accounting
principles.
Companies record revenue only when they receive cash, and
record expense only when they pay out cash.
LO 1
4-‹#›
Adjusting entries
ensure that the revenue recognition and expense recognition
principles are followed.
are required every time a company prepares financial
statements.
includes one income statement account and one balance sheet
account.
THE NEED FOR ADJUSTING ENTRIES
LO 1
4-‹#›
Adjusting entries are made to ensure that:

a. expenses are recognized in the period in which they are
incurred.
b. revenues are recognized in the period in which the
performance obligation is satisfied.
c. balance sheet and income statement accounts have correct
balances at the end of an accounting period.
d. All of the above.
Review Question
THE NEED FOR ADJUSTING ENTRIES
LO 1
4-‹#›
Deferrals:
1.Prepaid expenses: Expenses paid in cash and recorded as
assets before they are used or consumed.
2.Unearned revenues: Cash received before service are
performed.
Accruals:
1.Accrued revenues: Revenues for services performed but not
yet received in cash or recorded.
2.Accrued expenses: Expenses incurred but not yet paid in cash
or recorded.
TYPES OF ADJUSTING ENTRIES
ILLUSTRATION 4-3
Categories of adjusting entries
LO 1
4-‹#›

LO 1
Trial Balance – Each account is analyzed to determine whether
it is complete and up-to-date.
TYPES OF ADJUSTING ENTRIES
ILLUSTRATION 4-4
Trial balance
4-‹#›
Timing Concepts
Below is a list of concepts in the left column, with descriptions
of the concepts in the right column. There are more descriptions
provided than concepts. Match the description of the concept to
the concept.
DO IT!
1
LO 1
1. ____ Accrual-basis accounting.
2. ____ Calendar year.
3. ____ Periodicity assumption.
4. ____ Expense recognition principle.
(a) Monthly and quarterly time periods.
(b) Efforts (expenses) should be matched with results
(revenues).
(c) Accountants divide the economic life of a business into time
periods.
(d) Companies record revenues when they receive cash and
record expenses when they pay out cash.

(e) An accounting time period that starts on January 1 and ends
on December 31.
(f) Companies record transactions in the period in which the
events occur.
f
e
c
b
4-‹#›
Analyze business transactions
Journalize
Post
Trial Balance
Journalize and Post Adjusting Entries
Adjusted Trial Balance
Financial Statements
Closing Entries
Post-Closing Trial Balance
To defer means to postpone or delay.
LO 2
LEARNING OBJECTIVE
Prepare adjusting entries for deferrals.
2
4-‹#›
Deferrals are either:
Prepaid expenses
OR

Unearned revenues.
Deferrals
LO 2
4-‹#›
Expenses paid in cash before they are used or consumed.
insurance
supplies
advertising
Cash Payment
Expense Recorded
BEFORE
rent
equipment
buildings
Prepayments often occur in regard to:
PREPAID EXPENSES
LO 2
4-‹#›
Prepaid Expenses
Costs that expire either with the passage of time or through use.
Adjusting entry results in an increase (a debit) to an expense
account and a decrease (a credit) to an asset account.
PREPAID EXPENSES
LO 2

4-‹#›
Adjusting entries for prepaid expenses
Increases (debits) an expense account and
Decreases (credits) an asset account.
ILLUSTRATION 4-5
Adjusting entries for prepaid expenses
PREPAID EXPENSES
LO 2
4-‹#›
Illustration: Sierra Corporation purchased supplies costing
$2,500 on October 5. Sierra recorded the purchase by increasing
(debiting) the asset Supplies. This account shows a balance of
$2,500 in the October 31 trial balance. An inventory count at
the close of business on October 31 reveals that $1,000 of
supplies are still on hand.
Supplies
1,500
Supplies Expense
1,500
Oct. 31
ILLUSTRATION 4-6
($2,500 – 1,000 = $1,500)
Supplies
LO 2

4-‹#›
Illustration: On October 4, Sierra Corporation paid $600 for a
one-year fire insurance policy. Coverage began on October 1.
Sierra recorded the payment by increasing (debiting) Prepaid
Insurance. This account shows a balance of $600 in the October
31 trial balance. Insurance of $50 ($600 ÷ 12) expires each
month.
Prepaid Insurance
50
Insurance Expense
50
Oct. 31
ILLUSTRATION 4-7
Insurance
LO 2
4-‹#›
Buildings, equipment, and motor vehicles (long-lived assets) are
recorded as assets, rather than an expense, in the year acquired.
Depreciation is the process of allocating the cost of an asset to
expense (depreciation) over its useful life.
Depreciation does not attempt to report the actual change in the
value of the asset.
Depreciation
LO 2
4-‹#›

Illustration: For Sierra Corporation, assume that depreciation
on the office equipment is $480 a year, or $40 per month.
Accumulated Depreciation-Equipment
40
Depreciation Expense
40
Oct. 31
ILLUSTRATION 4-8
Depreciation
LO 2
4-‹#›
Statement Presentation
Accumulated Depreciation-Equipment is a contra asset account.
Appears just after the account it offsets (Equipment) on the
balance sheet.
ILLUSTRATION 4-9
Balance sheet presentation of
accumulated depreciation
Depreciation
▼ HELPFUL HINT
All contra accounts have increases, decreases, and normal
balances opposite to the account to which they relate.
LO 2
4-‹#›

ILLUSTRATION 4-10
Accounting for prepaid expenses
PREPAID EXPENSES
LO 2
4-‹#›
Receipt of cash recorded as a liability before services are
performed.
rent
airline tickets
Cash Receipt
Revenue Recorded
BEFORE
magazine subscriptions
customer deposits
Unearned revenues often occur in regard to:
UNEARNED REVENUES
LO 2
4-‹#›
Adjusting entry is made to record the revenue for services
performed during the period and to show the liability that
remains.
Adjusting entry results in a decrease (a debit) to a liability

account and an increase (a credit) to a revenue account.
UNEARNED REVENUES
LO 2
4-‹#›
Adjusting entries for unearned revenues
Decrease (a debit) to a liability account.
Increase (a credit) to a revenue account.
ILLUSTRATION 4-11
UNEARNED REVENUES
LO 2
4-‹#›
Illustration: Sierra Corporation received $1,200 on October 2
from R. Knox for guide services for multi-day trips expected to
be completed by December 31. Unearned Service Revenue
shows a balance of $1,200 in the October 31 trial balance.
From an evaluation of the service Sierra performed for Knox
during October, the company determines that it has earned $400
in October.
Service Revenue
400
Unearned Service Revenue
400
Oct. 31
ILLUSTRATION 4-12

UNEARNED REVENUES
LO 2
4-‹#›
ILLUSTRATION 4-13
Accounting for unearned revenues
Unearned Revenues recorded in liability accounts are now
recognized as revenue for services performed.
ACCOUNTING FOR UNEARNED REVENUES
Examples
Reason for
Adjustment
Accounts Before
Adjustment
Adjusting
Entry
Rent, magazine subscriptions, customer deposits for future
service.
Liabilities overstated.
Revenues understated.
Dr. Liabilities
Cr. Revenues
UNEARNED REVENUES
LO 2
4-‹#›

ACCOUNTING ACROSS THE ORGANIZATION
Turning Gift Cards into Revenue
Those of you who are marketing majors (and even most of you
who are not) know that gift cards are among the hottest
marketing tools in merchandising today. Customers purchase
gift cards and give them to someone for later use. In a recent
year, gift-card sales were expected to exceed $124 billion.
Although these programs are popular with marketing executives,
they create accounting questions. Should revenue be recorded at
the time the gift card is sold, or when it is exercised? How
should expired gift cards be accounted for? In a recent balance
sheet, Best Buy reported unearned revenue related to gift cards
of $406 million.
Source: “2014 Gift Card Sales to Top $124 Billion, But Growth
Slowing,” PRNewswire (December 10, 2014).
LO 2
4-‹#›
Adjusting Entries for Deferrals
The ledger of Hammond, Inc. on March 31, 2017, includes these
selected accounts before adjusting entries are prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $5,000
Unearned Service Revenue 9,200
An analysis of the accounts shows the following.
1. Insurance expires at the rate of $100 per month.
2. Supplies on hand total $800.
3. The equipment depreciates $200 a month.
4.During March, services were performed for $4,000 of the
unearned service revenue reported.

Prepare the adjusting entries for the month of March.
DO IT!
2
LO 2
4-‹#›
Debit Credit
Supplies 2,800
Equipment 25,000
Insurance expires at the rate of $100 per month.
SOLUTION
DO IT!
2
Insurance Expense100
Prepaid Insurance100
LO 2
4-‹#›

Debit Credit
Supplies 2,800
Equipment 25,000
Supplies on hand total $800.
SOLUTION
DO IT!
2
Supplies Expense2,000
Supplies2,000
LO 2
4-‹#›
Debit Credit
Supplies 2,800
Equipment 25,000
The equipment depreciates $200 a month.
SOLUTION

DO IT!
2
Depreciation Expense200
Accumulated Depreciation200
LO 2
4-‹#›
Debit Credit
Supplies 2,800
Equipment 25,000
During March, services were performed for $4,000 of the
unearned service revenue reported.
SOLUTION
DO IT!
2
Unearned Service Revenue4,000
Service Revenue4,000
LO 2
4-‹#›

Journalize
Post
Trial Balance
Journalize and Post Adjusting Entries
Closing Entries
Increase both a balance sheet and an income statement account.
LO 3
LEARNING OBJECTIVE
Prepare adjusting entries for accruals.
3
4-‹#›
Made to record:
Revenues for services performed and
OR
Expenses incurred
in the current accounting period that have not been recognized
through daily entries.
Adjusting Entries for Accruals
LO 3
4-‹#›
Revenues for services performed but not yet received in cash or
recorded.

rent
interest
services performed
BEFORE
Accrued revenues often occur in regard to:
Cash Receipt
Revenue Recorded
Adjusting entry results in:
ACCRUED REVENUES
LO 3
4-‹#›
Accrued Revenues
An adjusting entry serves two purposes:
Shows the receivable that exists, and
Records the revenues for services performed.
ACCRUED REVENUES
LO 3
4-‹#›
Adjusting entries for accrued revenues
Increases (debits) an asset account.
Increases (credits) a revenue account.
ILLUSTRATION 4-14
ACCRUED REVENUES
LO 3

4-‹#›
Illustration: In October, Sierra Corporation performed guide
services for $200 that were not billed to clients before October
31.
Service Revenue
200
Accounts Receivable
200
Oct. 31
ILLUSTRATION 4-15
ACCRUED REVENUES
LO 3
4-‹#›
ILLUSTRATION 4-16
Accounting for accrued revenues
Services performed but not yet received in cash or recorded.
ACCOUNTING FOR ACCRUED REVENUES
Examples
Reason for
Adjustment
Accounts Before
Adjustment
Adjusting
Entry

Interest, rent, services performed but not collected.
Assets understated.
Revenues understated.
Dr. Assets
Cr. Revenues
ACCRUED REVENUES
LO 3
4-‹#›
Expenses incurred but not yet paid in cash or recorded.
BEFORE
Accrued expenses often occur in regard to:
Cash Payment
Expense Recorded
utilities
salaries
Adjusting entry results in:
Interest
taxes
ACCRUED EXPENSES
LO 3
4-‹#›
An adjusting entry serves two purposes:
Records the obligations, and
Recognizes the expenses.
ACCRUED EXPENSES

LO 3
4-‹#›
Adjusting entries for accrued expenses
Increases (debits) an expense account.
Increases (credits) a liability account.
ILLUSTRATION 4-17
ACCRUED EXPENSES
LO 3
4-‹#›
Illustration: Sierra Corporation signed a three-month note
payable in the amount of $5,000 on October 1. The note
requires Sierra to pay interest at an annual rate of 12%.
Interest Payable
50
Interest Expense
50
Oct. 31
ILLUSTRATION 4-19
ILLUSTRATION 4-18
Formula for computing interest
Accrued Interest
$5,000 x 12% x 1/12 = $50
LO 3

4-‹#›
ILLUSTRATION 4-20
Illustration: Sierra Corporation last paid salaries on October
26; the next payment of salaries will not occur until November
9. The employees receive total salaries of $2,000 for a five-day
work week, or $400 per day. Thus, accrued salaries at October
31 are $1,200 ($400 × 3 days).
Accrued Salaries
LO 3
4-‹#›
Salaries and Wages Payable
1,200
Salaries and Wages Expense
1,200
Oct. 31
ILLUSTRATION 4-21
Illustration: Sierra Corporation last paid salaries on October
26; the next payment of salaries will not occur until November
9. The employees receive total salaries of $2,000 for a five-day
work week, or $400 per day. Thus, accrued salaries at October
31 are $1,200 ($400 × 3 days).
Accrued Salaries
LO 3
4-‹#›

ILLUSTRATION 4-22
Accounting for accrued expenses
ACCRUED EXPENSES
LO 3
4-‹#›
PEOPLE, PLANET, AND PROFIT INSIGHT
Got Junk?
Do you have an old computer or two in your garage? How about
an old TV that needs replacing? Many people do.
Approximately 163,000 computers and televisions become
obsolete each day. Yet, in a recent year, only 11% of computers
were recycled. It is estimated that 75% of all computers ever
sold are sitting in storage somewhere, waiting to be disposed of.
Each of these old TVs and computers is loaded with lead,
cadmium, mercury, and other toxic chemicals. If you have one
of these electronic gadgets, you have a responsibility, and a
probable cost, for disposing of it. Companies have the same
problem, but their discarded materials may include lead paint,
asbestos, and other toxic chemicals.
LO 3
4-‹#›

ILLUSTRATION 4-23
Summary of adjusting entries
SUMMARY OF BASIC RELATIONSHIPS
LO 3
4-‹#›
Micro Computer Services Inc. began operations on August 1,
2017. At the end of August 2017, management attempted to
prepare monthly financial statements. The following
information relates to August.
At August 31, the company owed its employees $800 in salaries
that will be paid on September 1.
On August 1, the company borrowed $30,000 from a bank on a
15-year mortgage. The annual interest rate is 10%.
Revenue for services performed but unrecorded for August
totaled $1,100.
Prepare the adjusting entries needed at August 31, 2017.
DO IT!
3
LO 3
4-‹#›

prepare monthly financial statements. Prepare the adjusting
entries needed at August 31, 2017.
At August 31, the company owed its employees $800 in salaries
that will be paid on September 1.
SOLUTION
DO IT!
3
Salaries and Wages Expense 800
Salaries and Wages Payable 800
LO 3
4-‹#›
On August 1, the company borrowed $30,000 from a bank on a
15-year mortgage. The annual interest rate is 10%.
SOLUTION
DO IT!
3
Interest Expense 250
Interest Payable 250
LO 3
4-‹#›

Revenue for services performed but unrecorded for August
totaled $1,100.
SOLUTION
DO IT!
3
Accounts Receivable 1,100
Service Revenue 1,100
LO 3
4-‹#›
Journalize
Post
Trial Balance
Adjusting Entries
Adjusted trial balance
Prepare financial statements
Journalize and post closing entries
Prepare a post-closing trial balance
LO 4
LEARNING OBJECTIVE
Prepare an adjusted trial balance and closing entries.
4

4-‹#›
After all adjusting entries are journalized and posted the
company prepares another trial balance from the ledger accounts
(Adjusted Trial Balance).
The adjusted trial balance’s purpose is to prove the equality of
debit balances and credit balances in the ledger.
The adjusted trial balance is the primary basis for the
preparation of the financial statements.
PREPARE ADJUSTED TRIAL BALANCE
LO 4
4-‹#›
LO 4
ILLUSTRATION 4-26
Adjusted trial balance
4-‹#›
PREPARE ADJUSTED TRIAL BALANCE
Which of the following statements is incorrect concerning the
adjusted trial balance?
An adjusted trial balance proves the equality of the total debit
balances and the total credit balances in the ledger after all
adjustments are made.
The adjusted trial balance provides the primary basis for the

preparation of financial statements.
The adjusted trial balance lists the account balances segregated
by assets and liabilities.
The adjusted trial balance is prepared after the adjusting entries
have been journalized and posted.
Review Question
LO 4
4-‹#›
Financial statements are prepared directly from the Adjusted
Trial Balance.
Balance Sheet
Income Statement
Retained Earnings Statement
PREPARING FINANCIAL STATEMENTS
LO 4
4-‹#›
ILLUSTRATION 4-27
Preparation of the income statement and retained earnings
statement from the adjusted trial balance
4-68
4-‹#›

Tell students to look at the date on the income statement in
Illustration 4-27. The date is “For the Month Ending October
31, 2014.” How can one be sure the revenues and expenses
reported on the income statement are just for that period?
Closing entries transfer the temporary account balances to the
stockholders’ equity account and reduce the balances in the
temporary accounts to zero. Therefore, at the beginning of the
period the temporary accounts have a balance of zero and the
revenues and expenses accumulated are for that particular
period.
ILLUSTRATION 4-28
Preparation of the balance sheet from the adjusted trial balance
LO 4
4-‹#›
Quality of Earnings – company provides full and transparent
information.
Earnings Management - the planned timing of revenues,
expenses, gains, and losses to smooth out bumps in net income.
Companies may manage earnings by:
one-time items to prop up earnings numbers.
inflating revenue numbers in the short-run.
improper adjusting entries.
As a result of the Sarbanes-Oxley Act, many companies are
trying to improve the quality of their financial reporting.
QUALITY OF EARNINGS
LO 4

4-‹#›
Trial Balance
DO IT!
4a
LO 4
4-‹#›
Trial Balance
DO IT!
(a) Determine the net income for the quarter April 1 to June 30.
LO 4
4a

4-‹#›
Trial Balance
DO IT!
Determine the total assets and total liabilities at June 30, 2017.
LO 4
4a
4-‹#›
Trial Balance
DO IT!
Determine the balance in Retained Earnings at June 30, 2017.
Retained earnings, April 1 $ 0
Add: Net income 2,490

Less: Dividends 600
Retained earnings, June 30 $1,890
LO 4
4a
4-‹#›
At the end of the accounting period, companies transfer the
temporary account balances to the permanent stockholders’
equity account—Retained Earnings.
ILLUSTRATION 4-29
Temporary versus permanent accounts
CLOSING THE BOOKS
LO 4
4-‹#›
In addition to updating Retained Earnings to its correct ending
balance, closing entries produce a zero balance in each
temporary account.
ILLUSTRATION 4-30
The closing process
Preparing Closing Entries
LO 4
4-‹#›

LO 4
ILLUSTRATION 4-31
4-‹#›
Illustration 4-32
Posting of closing entries
Preparing Closing Entries
LO 4
4-‹#›
The purpose of the post-closing trial balance is to prove the
equality of the permanent account balances that the company
carries forward into the next accounting period.
All temporary accounts will have zero balances.
Preparing a Post-Closing Trail Balance
LO 4
4-‹#›

1. Analyze business transactions
2. Journalize the transactions
6. Prepare an adjusted trial balance
7. Prepare financial statements
8. Journalize and post closing entries
9. Prepare a post-closing trial balance
4. Prepare a trial balance
3. Post to ledger accounts
Journalize and post adjusting entries:
Deferrals/Accruals
ILLUSTRATION 4-33
Required steps in the accounting cycle
SUMMARY OF THE ACCOUNTING CYCLE
LO 4
4-‹#›
ILLUSTRATION 4-33

LO 4
4-‹#›
ILLUSTRATION 4-33
LO 4
4-‹#›
ILLUSTRATION 4-33
LO 4
4-‹#›
ILLUSTRATION 4-33
LO 4
4-‹#›

ILLUSTRATION 4-33
LO 4
4-‹#›
ILLUSTRATION 4-33
LO 4
4-‹#›
ILLUSTRATION 4-33
LO 4
4-‹#›

ILLUSTRATION 4-33
LO 4
4-‹#›
ILLUSTRATION 4-33
LO 4
4-‹#›
Sierra Corporation’s income statement shows net income of
$2,860. Net income and net cash provided by operating
activities often differ.
Net income on a cash basis is referred to as “Net cash provided
by operating activities.”
The statement of cash flows, reports net cash provided by
operating activities.
Illustration 4-27
KEEPING AN EYE ON CASH
LO 4
4-‹#›

The difference for Sierra is $2,840 ($5,700 - $2,860). The
following summary shows the causes of this difference.
LO 4
KEEPING AN EYE ON CASH
4-‹#›
Closing Entries
Hancock Company has the following balances in selected
accounts of its adjusted trial balance.
Accounts Payable $27,000 Dividends $15,000
Service Revenue 98,000 Retained Earnings 42,000
Rent Expense 22,000 Accounts Receivable 38,000
Salaries and Wages Expense51,000 Supplies Expense 7,000
Prepare the entries to close the revenue and expense accounts.
SOLUTION
DO IT!
4b
Service Revenue 98,000
Income Summary 98,000
Salaries and Wages Expense 51,000
Rent Expense 22,000
Supplies Expense 7,000
LO 4
4-‹#›

Closing Entries
Hancock Company has the following balances in selected
accounts of its adjusted trial balance.
Accounts Payable $27,000 Dividends $15,000
Service Revenue 98,000 Retained Earnings 42,000
Rent Expense 22,000 Accounts Receivable 38,000
Salaries and Wages Expense51,000 Supplies Expense 7,000
Prepare the entries to close income summary and dividends.
SOLUTION
DO IT!
4b
Retained Earnings 18,000
Retained Earnings 15,000
Dividends 15,000
LO 4
4-‹#›
LO 5
LEARNING OBJECTIVE
APPENDIX 4A: Describe the purpose and the basic form of a
worksheet.
*5
Worksheet
A multiple-column form that may be used in the adjustment
process and in preparing financial statements.
Manual or computer spreadsheet.

A working tool, not a permanent accounting record.
Neither a journal nor a part of the general ledger.
4-‹#›
ILLUSTRATION 4A-1
Form and procedure for a worksheet
SIERRA CORPORATION
Worksheet
For the Month Ended October 31, 2017
LO 5
4-‹#›
(a)

(b)
(a)
(g)
(c)
(d)
(d)
(e)
(b)
(e)
(f)
(f)
(g)
(c)
ILLUSTRATION 4A-1
Form and procedure for a worksheet
SIERRA CORPORATION
Worksheet
For the Month Ended October 31, 2017
LO 5
4-‹#›
KEY POINTS
A Look at IFRS
LEARNING OBJECTIVE
Compare the procedures for adjusting entries under GAAP and
IFRS.
6
Similarities

Companies applying IFRS also use accrual-basis accounting to
ensure that they record transactions that change a company’s
financial statements in the period in which events occur.
Similar to GAAP, cash-basis accounting is not in accordance
with IFRS.
LO 6
4-‹#›
A Look at IFRS
KEY POINTS
Similarities
IFRS also divides the economic life of companies into artificial
time periods. Under both GAAP and IFRS, this is referred to as
the periodicity assumption.
The general revenue recognition principle required by GAAP
that is used in this textbook is similar to that used under IFRS.
Revenue recognition fraud is a major issue in U.S. financial
reporting. The same situation occurs in other countries, as
evidenced by revenue recognition breakdowns at Dutch software
company Baan NV, Japanese electronics giant NEC, and Dutch
grocer Ahold NV.
LO 6
4-‹#›

A Look at IFRS
KEY POINTS
Differences
Under IFRS, revaluation (using fair value) of items such as land
and buildings is permitted. IFRS allows depreciation based on
revaluation of assets, which is not permitted under GAAP.
The terminology used for revenues and gains, and expenses and
losses, differs somewhat between IFRS and GAAP. For
example, income under IFRS includes both revenues, which
arise during the normal course of operating activities, and gains,
which arise from activities outside of the normal sales of goods
and services.
LO 6
4-‹#›
A Look at IFRS
KEY POINTS
Differences
Under IFRS, expenses include both those costs incurred in the
normal course of operations as well as losses that are not part of
normal operations. This is in contrast to GAAP, which defines
each separately.
LO 6
4-‹#›

A Look at IFRS
LOOKING TO THE FUTURE
The IASB and FASB are completing a joint project on revenue
recognition. The purpose of this project is to develop
comprehensive guidance on when to recognize revenue. It is
hoped that this approach will lead to more consistent accounting
in this area. For more on this topic, see
www.fasb.org/project/revenue_recognition.shtml.
LO 6
4-‹#›
IFRS Practice
IFRS:
uses accrual accounting.
uses cash-basis accounting.
allows revenue to be recognized when a customer makes an
order.
requires that revenue not be recognized until cash is received.
A Look at IFRS
LO 6
4-‹#›

IFRS Practice
Which of the following statements is false?
IFRS employs the periodicity assumption.
IFRS employs accrual accounting.
IFRS requires that revenues and costs must be capable of being
measured reliably.
IFRS uses the cash basis of accounting.
A Look at IFRS
LO 6
4-‹#›
IFRS Practice
Accrual-basis accounting:
is optional under IFRS.
results in companies recording transactions that change a
company’s financial statements in the period in which events
occur.
has been eliminated as a result of the IASB/FASB joint project
on revenue recognition.
is not consistent with the IASB conceptual framework.
A Look at IFRS

LO 6
4-‹#›
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Reproduction or translation of this work beyond that permitted
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and not for distribution or resale. The Publisher assumes no
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use of these programs or from the use of the information
contained herein.”
COPYRIGHT
4-‹#›
Account TitlesDr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.
Cash15,200
Supplies2,500
Prepaid Insurance600
Equipment5,000
Notes Payable5,000
Accounts Payable2,500
Unearned Service Revenue1,200
Common Stock10,000
Dividends500
Salaries & Wages Exp.4,000
Rent Expense900

Totals28,700 28,700
Balance Sheet
AdjustedIncome
Trial BalanceAdjustmentsTrial BalanceStatement
Sheet1AdjustedIncomeTrial BalanceAdjustmentsTrial
BalanceStatementBalance SheetAccount
TitlesDr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Cash15,200Supplies2,500P
repaid Insurance600Equipment5,000Notes
Payable5,000Accounts Payable2,500Unearned Service
Revenue1,200Common Stock10,000Dividends500Service
Revenue10,000Salaries & Wages Exp.4,000Rent
Expense900Totals28,70028,700Miscellaneous Expense
20055,970 55,970
Account TitlesDr.Cr.Dr.Cr.Dr.Cr. Dr. Cr. Dr. Cr.
Cash15,200 15,200 15,200
Supplies2,500 1,500 1,000 1,000
Prepaid Insurance600 50 550 550
Equipment5,000 5,000 5,000
Notes Payable5,000 5,000 5,000
Accounts Payable2,500 2,500 2,500
Unearned Service Revenue1,200 400 800 800
Common Stock10,000 10,000 10,000
Dividends500 500 500
Service Revenue10,000 400 10,600 10,600
200
Salaries & Wages Exp.4,000 1,200 5,200 5,200
Rent Expense900 900 900
Totals28,700 28,700
Supplies Expense1,500 1,500 1,500
Insurance Expense50 50 50
Accumulated Depreciation40 40 40
Depreciation Expense40 40 40
Accounts Receivable200 200 200
Interest Expense50 50 50
Interest Payable50 50 50
Salaries and Wages Payable1,200 1,200 1,200

Totals3,440 3,440 30,190 30,190 7,740 10,600
22,450 19,590
Net Income2,860 2,860
Totals10,600 10,600 22,450 22,450
Balance Sheet
Adjusted Income
Trial BalanceAdjustmentsTrial Balance Statement
Sheet1AdjustedIncomeTrial BalanceAdjustmentsTrial
BalanceStatementBalance SheetAccount
TitlesDr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Cash15,20015,20015,200S
upplies2,5001,5001,0001,000Prepaid
Insurance60050550550Equipment5,0005,0005,000Notes
Payable5,0005,0005,000Accounts
Payable2,5002,5002,500Unearned Service
Revenue1,200400800800Common
Stock10,00010,00010,000Dividends500500500Service
Revenue10,00040010,60010,600200Salaries & Wages
Exp.4,0001,2005,2005,200Rent
Expense900900900Totals28,70028,700Supplies
Expense1,5001,5001,500Insurance Expense505050Accumulated
Depreciation404040Depreciation Expense404040Accounts
Receivable200200200Interest Expense505050Interest
Payable505050Salaries and Wages
Payable1,2001,2001,200Totals3,4403,44030,19030,1907,74010,
60022,45019,590Net
Income2,8602,860Totals10,60010,60022,45022,450Miscellaneo
us Expense 20055,970 55,970
The Accounting Information System
3

3-‹#›
Explain how accounts, debits, and credits are used to record
business transactions.
CHAPTER OUTLINE
Analyze the effect of business transactions on the basic
accounting equation.
1
2
LEARNING OBJECTIVES
Indicate how a journal is used in the recording process.
3
Explain how a ledger and posting help in the recording process.
4
Prepare a trial balance.
5
3-‹#›
Accounting Information System
System of
collecting and
processing transaction data and
communicating financial information to decision-makers.
LEARNING OBJECTIVE
Analyze the effect of business transactions on the basic
accounting equation.
1
LO 1

3-‹#›
Accounting information systems rely on a process referred to as
the accounting cycle.
Accounting Information System
Journalize
Post
Trial Balance
Adjusting Entries
Closing Entries
Most businesses use computerized accounting systems.
LO 1
3-‹#›
Transactions are economic events that require recording in the
financial statements.
Not all activities represent transactions.
Assets, liabilities, or stockholders’ equity items change as a
result of some economic event.
Dual effect on the accounting equation.
ACCOUNTING TRANSACTIONS
LO 1
3-‹#›

Question: Are the following events recorded in the accounting
records?
Event
Purchase computer
Criterion
Pay rent
Record/ Don’t Record
Discuss guided trip options with potential customer
Illustration 3-1
Transaction identification process
ACCOUNTING TRANSACTIONS
Is the financial position (assets, liabilities, or stockholders’
equity) of the company changed?
LO 1
3-‹#›
Assets
Liabilities
Stockholders’ Equity
=
+
Basic Accounting Equation
The process of identifying the specific effects of economic

events on the accounting equation.
ANALYZING TRANSACTIONS
LO 1
3-‹#›
Illustration 3-2
Expanded accounting equation
LO 1
3-‹#›
Event (1). On October 1, cash of $10,000 is invested in Sierra
Corporation by investors in exchange for $10,000 of common
stock.
1.+10,000+10,000
LO 1
3-‹#›
Event (2). On October 1, Sierra borrowed $5,000 from Castle
Bank by signing a 3-month, 12%, $5,000 note payable.

1.+10,000+10,000
2.+5,000+5,000
LO 1
3-‹#›
Event (3). On October 2, Sierra purchased equipment by paying
$5,000 cash to Superior Equipment Sales Co.
3.-5,000+5,000
1.+10,000+10,000
2.+5,000+5,000
LO 1
3-‹#›
Event (4). On October 2, Sierra received a $1,200 cash advance
from R. Knox, a client.
4.+1,200+1,200
3.-5,000+5,000
1.+10,000+10,000
2.+5,000+5,000
LO 1

3-‹#›
Event (5). On October 3, Sierra received $10,000 in cash from
Copa Company for guide services performed.
4.+1,200+1,200
5.+10,000+10,000
3.-5,000+5,000
1.+10,000+10,000
2.+5,000+5,000
LO 1
3-‹#›
Event (6). On October 3, Sierra Corporation paid its office rent
for the month of October in cash, $900.
4.+1,200+1,200
5.+10,000+10,000
6.-900-900
3.-5,000+5,000
1.+10,000+10,000
2.+5,000+5,000
LO 1
3-‹#›

Event (7). On October 4, Sierra paid $600 for a one-year
insurance policy that will expire next year on September 30.
4.+1,200+1,200
5.+10,000+10,000
6.-900-900
7.-600+600
3.-5,000+5,000
1.+10,000+10,000
2.+5,000+5,000
LO 1
3-‹#›
Event (8). On October 5, Sierra purchased an estimated three
months of supplies on account from Aero Supply for $2,500.
4.+1,200+1,200
5.+10,000+10,000
6.-900-900
7.-600+600
8.+2,500+2,500
3.-5,000+5,000
1.+10,000+10,000
2.+5,000+5,000
LO 1
3-‹#›

Event (9). On October 9, Sierra hired four new employees to
begin work on October 15.
4.+1,200+1,200
5.+10,000+10,000
6.-900-900
7.-600+600
8.+2,500+2,500
3.-5,000+5,000
1.+10,000+10,000
2.+5,000+5,000
An accounting transaction has not occurred.
LO 1
3-‹#›
Event (10). On October 20, Sierra paid a $500 dividend.
4.+1,200+1,200
5.+10,000+10,000
6.-900-900
7.-600+600
8.+2,500+2,500
10.-500-500
3.-5,000+5,000
1.+10,000+10,000
2.+5,000+5,000
LO 1

3-‹#›
Event (11). Employees have worked two weeks, earning $4,000
in salaries, which were paid on October 26.
4.+1,200+1,200
5.+10,000+10,000
6.-900-900
7.-600+600
8.+2,500+2,500
10.-500-500
11.-4,000-4,000
3.-5,000+5,000
1.+10,000+10,000
2.+5,000+5,000
LO 1
3-‹#›
INVESTOR INSIGHT
Why Accuracy Matters
While most companies record transactions very carefully, the
reality is that mistakes still happen. For example, bank
regulators fi ned Bank One Corporation (now JPMorgan Chase)
$1.8 million because they felt that the unreliability of the
bank’s accounting system caused it to violate regulatory
requirements. Also, in recent years Fannie Mae, the government
chartered mortgage association, announced a series of large

accounting errors. These announcements caused alarm among
investors, regulators, and politicians because they feared that
the errors might suggest larger, undetected problems. This was
important because the home-mortgage market depends on
Fannie Mae to buy hundreds of billions of dollars of mortgages
each year from banks, thus enabling the banks to issue new
mortgages. Finally, before a major overhaul of its accounting
system, the financial records of Waste Management Company
were in such disarray that of the company’s 57,000 employees,
10,000 were receiving pay slips that were in error. The
Sarbanes-Oxley Act was created to minimize the occurrence of
errors like these by increasing every employee’s responsibility
for accurate financial reporting.
LO 1
3-‹#›
Transaction Analysis
A tabular analysis of the transactions for the month of August is
shown below. Describe each transaction.
DO IT!
1
LO 1
1. Company issued shares of stock for $25,000 cash.
2. Company purchased $7,000 of equipment on account.
3. Company received $8,000 cash in exchange for services
performed.
4. Company paid $850 for this month’s rent.
3-‹#›

Double-entry system
Each transaction must affect two or more accounts to keep the
basic accounting equation in balance.
Recording done by debiting at least one account and crediting
another.
DEBITS must equal CREDITS.
Debit and Credit Procedures
LEARNING OBJECTIVE
Explain how accounts, debits, and credits are used to record
business transactions.
2
LO 2
3-‹#›
If Debits are greater than Credits, the account will have a debit
balance.
$10,000
Transaction #2
$3,000
$15,000
8,000
Transaction #3
Balance
Transaction #1
DEBIT AND CREDIT PROCEDURES
LO 2

3-‹#›
$10,000
Transaction #2
$3,000
Balance
Transaction #1
$1,000
8,000
Transaction #3
DEBIT AND CREDIT PROCEDURES
If Debits are greater than Credits, the account will have a debit
balance.
LO 2
3-‹#›
Assets - Debits should exceed credits.
Liabilities – Credits should exceed debits.
Procedures for Assets and Liabilities
▼ HELPFUL HINT
The normal balance is the side where increases in the account
are recorded.
LO 2

3-‹#›
Investments by stockholders and revenues increase
stockholders’ equity (credit).
Dividends and expenses decrease stockholder’s equity (debit).
Procedures for Stockholders’ Equity
LO 2
3-‹#›
Revenues increase stockholder’s equity.
Expenses have the opposite effect: expenses decrease
stockholders’ equity.
The effect of debits and credits on revenue and expense
accounts is the same as their effect on stockholders’ equity.
Procedures for Stockholders’ Equity

LO 2
3-‹#›
INVESTOR INSIGHT
Keeping Score
The Chicago Cubs baseball team has these major revenue and
expense accounts:
Revenues Expenses
Admissions (ticket sales) Players’ salaries
Concessions Administrative salaries
Television and radio Travel
Advertising Ballpark maintenance
Chicago Cubs
LO 2
3-‹#›
STOCKHOLDERS’ EQUITY RELATIONSHIPS
ILLUSTRATION 3-15
Stockholders’ equity
relationships
LO 2
3-‹#›
LO 2

Normal Balance Credit
Normal Balance Debit
DEBIT/CREDIT RULES
3-‹#›
Balance Sheet Income Statement
=
+
=
-
Asset
Liability
Equity
Revenue
Expense
Debit
Credit

SUMMARY OF DEBIT/CREDIT RULES
LO 2
3-‹#›
Relationship among the assets, liabilities and stockholders’
equity of a business:
The equation must be in balance after every transaction. For
every Debit there must be a Credit.
ILLUSTRATION 3-16
Assets
Liabilities
=
Basic Equation
Expanded Basic Equation
+
LO 2
3-‹#›

Review Question
Debits:
increase both assets and liabilities.
decrease both assets and liabilities.
increase assets and decrease liabilities.
decrease assets and increase liabilities.
LO 2
3-‹#›
Review Question
Accounts that normally have debit balances are:
assets, expenses, and revenues.
assets, expenses, and equity.
assets, liabilities, and dividends.
assets, dividends, and expenses.
LO 2
3-‹#›
The Recording Process
LEARNING OBJECTIVE
Indicate how a journal is used in the recording process.

3
LO 3
Journalize the transaction
Post to ledger accounts
Analyze each transaction in terms of its effect on the accounts.
Enter the transaction information in a journal.
Transfer the journal information to the appropriate accounts in
the ledger.
3-‹#›
THE RECORDING PROCESS
Analyze transaction
Enter
transaction
Transfer from journal to ledger
ILLUSTRATION 3-17
The recording process
LO 3
3-‹#›
Transactions recorded in chronological order in a journal before
they are transferred to the accounts.
Contributions to the recording process:

Discloses the complete effects of a transaction.
Provides a chronological record of transactions.
Helps to prevent or locate errors because the debit and credit
amounts can be easily compared.
THE JOURNAL
LO 3
3-‹#›
Journalizing - Entering transaction data in the journal.
Illustration: Presented below is information related to Sierra
Corporation.
Oct. 1Sierra issued common stock in exchange for $10,000 cash.
1Sierra borrowed $5,000 by signing a note.
2 Sierra purchased equipment for $5,000.
Instructions - Journalize these transactions.
THE JOURNAL
LO 3
3-‹#›
THE JOURNAL
Oct. 1Sierra issued common stock in exchange for $10,000 cash.
General Journal
Cash
Common Stock

10,000
10,000
Oct. 1
LO 3
3-‹#›
THE JOURNAL
Oct. 1Sierra borrowed $5,000 by signing a note.
General Journal
Cash
Notes Payable
5,000
5,000
Oct. 1
LO 3
3-‹#›
THE JOURNAL
Oct. 2Sierra purchased equipment for $5,000.
General Journal
Equipment
Cash

5,000
5,000
Oct. 2
LO 3
3-‹#›
THE JOURNAL
ILLUSTRATION 3-18
Recording transactions in
journal form
LO 3
3-‹#›
Boosting Profits
Microsoft originally designed the Xbox 360 to have 256
megabytes of memory. But the design department said that
amount of memory wouldn’t support the best special effects.
The purchasing department said that adding more memory
would cost $30—which was 10% of the estimated selling price
of $300. The marketing department, however, “determined that
adding the memory would let Microsoft reduce marketing costs
and attract more game developers, boosting royalty revenue. It
would also extend the life of the console, generating more
sales.” As a result of these changes, Xbox enjoyed great
success. But, it does have competitors. Its newest video game
console, Xbox One, is now in a battle with Sony’s Playstation4
for market share. How to compete? First, Microsoft bundled the

critically acclaimed Titan fall with its Xbox One. By including
the game most Xbox One buyers were going to purchase
anyway, Microsoft was making its console more attractive. In
addition, retailers are also discounting the Xbox, which should
get the momentum going for increased sales. What Microsoft is
doing is making sure that Xbox One is the center of the home
entertainment system in the long run.
LO 3
3-‹#›
Journal Entries
The following events occurred during the first month of
business of Hair It Is Inc., Kate Browne’s beauty salon:
Issued common stock to shareholders in exchange for $20,000
cash.
Purchased $4,800 of equipment on account (to be paid in 30
days).
Interviewed three people for the position of stylist.
The three activities are recorded as follows:
DO IT!
3
1. Cash 20,000
Common Stock 20,000
2. Equipment 4,800
Accounts Payable 4,800
3. No entry because no transaction occurred.
LO 3
3-‹#›

The Accounting Cycle
LEARNING OBJECTIVE
Explain how a ledger and posting help in the recording process.
4
LO 4
Trial Balance
Adjusting Entries
Closing Entries
3-‹#›
The Ledger is comprised of the entire group of accounts
maintained by a company.
THE LEDGER
ILLUSTRATION 3-19
The general ledger
LO 4
3-‹#›
Listing of accounts used by a company to record transactions.
CHART OF ACCOUNTS

ILLUSTRATION 3-20
Chart of accounts for Sierra
Corporation
LO 4
3-‹#›
General Ledger
J1
The process of transferring journal entry amounts to ledger
accounts.
POSTING
General Journal
Cash
Common Stock
10,000
10,000
Oct. 1
J1
Oct. 1
Stock issued
10,000
10,000
101
LO 4

3-‹#›
POSTING
Review Question
Posting:
normally occurs before journalizing.
transfers ledger transaction data to the journal.
is an optional step in the recording process.
transfers journal entries to ledger accounts.
LO 4
3-‹#›
ETHICS INSIGHT
A Convenient Overstatement
Sometimes a company’s investment securities suffer a
permanent decline in value below their original cost. When this
occurs, the company is supposed to reduce the recorded value of
the securities on its balance sheet (“write them down” in
common financial lingo) and record a loss. It appears, however,
that during the financial crisis of 2008, employees at some
financial institutions chose to look the other way as the value of
their investments skidded. A number of Wall Street traders that
worked for the investment bank Credit Suisse Group were
charged with intentionally overstating the value of securities
that had suffered declines of approximately $2.85 billion. One
reason that they may have been reluctant to record the losses is
out of fear that the company’s shareholders and clients would
panic if they saw the magnitude of the losses. However,
personal self-interest might have been equally to blame—the

bonuses of the traders were tied to the value of the investment
securities.
Source: S. Pulliam, J. Eaglesham, and M. Siconolfi , “U.S.
Plans Changes on Bond Fraud,” Wall Street Journal Online
(February 1, 2012).
Credit Suisse Group
LO 4
3-‹#›
Follow these steps:
1. Determine what type of account is involved.
2. Determine what items increased or decreased and by how
much.
3. Translate the increases and decreases into debits and credits.
RECORDING PROCESS ILLUSTRATED
ILLUSTRATION 3-21
Investment of cash by
stockholders
LO 4
3-‹#›
LO 4
ILLUSTRATION 3-22
3-‹#›

LO 4
ILLUSTRATION 3-23
3-‹#›
ILLUSTRATION 3-24
LO 4
3-‹#›
ILLUSTRATION 3-25
LO 4
3-‹#›
ILLUSTRATION 3-26
LO 4
3-‹#›
ILLUSTRATION 3-27
LO 4

3-‹#›
LO 4
ILLUSTRATION 3-28
3-‹#›
ILLUSTRATION 3-29
LO 4
3-‹#›
ILLUSTRATION 3-30
LO 4
3-‹#›
ILLUSTRATION 3-31
LO 4
3-‹#›

LO 4
JOURNALIZING SUMMARY
ILLUSTRATION 3-32
General journal for Sierra Corporation
3-‹#›
LO 4
Illustration 3-32
3-‹#›
ILLUSTRATION 3-33
General ledger for Sierra Corporation
POSTING SUMMARY
3-‹#›
Selected transactions from the journal of Faital Inc. during its
first month of operations are presented below. Post these
transactions to T-accounts.

Posting
DO IT!
4
LO 4
3-‹#›
The Accounting Cycle
LEARNING OBJECTIVE
Prepare a trial balance.
5
LO 5
Prepare a Trial Balance
Adjusting Entries
Closing Entries
3-‹#›

A list of accounts and their balances at a given time.
Accounts are listed in the order in which they appear in the
ledger.
Purpose is to prove that debits equal credits.
May also uncover errors in journalizing and posting.
Useful in the preparation of financial statements.
TRIAL BALANCE
▼ HELPFUL HINT
Note that the order of
presentation in the trial balance is:
Assets
Liabilities
Stockholders’ equity
Revenues
Expenses
LO 5
3-‹#›
TRIAL BALANCE
ILLUSTRATION 3-34
Sierra Corporation
trial balance
LO 5
3-‹#›

The trial balance may balance even when
a transaction is not journalized,
a correct journal entry is not posted,
a journal entry is posted twice,
incorrect accounts are used in journalizing or posting, or
offsetting errors are made in recording the amount of a
transaction.
ETHICS NOTE An error is the result of an unintentional
mistake. It is neither ethical nor unethical. An irregularity is an
intentional misstatement, which is viewed as unethical.
LIMITATIONS OF A TRIAL BALANCE
LO 5
3-‹#›
Review Question
A trial balance will not balance if:
a correct journal entry is posted twice.
the purchase of supplies on account is debited to Supplies and
credited to Cash.
a $100 cash dividends is debited to the Dividends account for
$1,000 and credited to Cash for $100.
a $450 payment on account is debited to Accounts Payable for
$45 and credited to Cash for $45.
TRIAL BALANCE
LO 5
3-‹#›

Trial Balance
DO IT!
5
The following accounts come from the ledger of SnowGo
Corporation at December 31, 2017.
Equipment $88,000
Dividends 8,000
Accounts Payable 22,000
Salaries and Wages
Expense42,000
Accounts Receivable4,000
Common Stock$20,000
Salaries and Wages
Payable 2,000
Notes Payable (due in
3 months) 19,000
Utilities Expense 3,000
Prepaid Insurance 6,000
Cash 7,000
Prepare a trial balance in good form.
LO 5
3-‹#›
LO 5

3-‹#›
KEY POINTS
A Look at IFRS
LEARNING OBJECTIVE
Compare the procedures for the recording process under GAAP
and IFRS.
6
Similarities
Transaction analysis is the same under IFRS and GAAP.
Both the IASB and the FASB go beyond the basic definitions
provided in the textbook for the key elements of financial
statements, that is assets, liabilities, equity, revenues, and
expenses. The implications of the expanded definitions are
discussed in more advanced accounting courses.
LO 6

3-‹#›
A Look at IFRS
KEY POINTS
Similarities
As shown in the textbook, dollar signs are typically used only in
the trial balance and the financial statements. The same practice
is followed under IFRS, using the currency of the country where
the reporting company is headquartered.
A trial balance under IFRS follows the same format as shown in
the textbook.
LO 6
3-‹#›
A Look at IFRS
KEY POINTS
Differences
IFRS relies less on historical cost and more on fair value than
do FASB standards.
Internal controls are a system of checks and balances designed
to prevent and detect fraud and errors. While most public U.S.
companies have these systems in place, many non-U.S.

companies have never completely documented the controls nor
had an independent auditor attest to their effectiveness.
LO 6
3-‹#›
A Look at IFRS
The basic recording process shown in this textbook is followed
by companies around the globe. It is unlikely to change in the
future. The definitional structure of assets, liabilities, equity,
revenues, and expenses may change over time as the IASB and
FASB evaluate their overall conceptual framework for
establishing accounting standards.
LO 6
3-‹#›
IFRS Practice
Which statement is correct regarding IFRS?
IFRS reverses the rules of debits and credits, that is, debits are
on the right and credits are on the left.
IFRS uses the same process for recording transactions as GAAP.
The chart of accounts under IFRS is different because revenues
follow assets.
None of the above statements are correct.

A Look at IFRS
LO 6
3-‹#›
IFRS Practice
A trial balance:
is the same under IFRS and GAAP.
proves that transactions are recorded correctly.
proves that all transactions have been recorded.
will not balance if a correct journal entry is posted twice.
A Look at IFRS
LO 6
3-‹#›
IFRS Practice
One difference between IFRS and GAAP is that:
GAAP uses accrual-accounting concepts and IFRS uses
primarily the cash basis of accounting.
IFRS uses a different posting process than GAAP.
IFRS uses more fair value measurements than GAAP.
the limitations of a trial balance are different between IFRS and

GAAP.
A Look at IFRS
LO 6
3-‹#›
COPYRIGHT
3-‹#›
Account Name
Debit / Dr.
Credit / Cr.

Account Name
Debit / Dr.
Credit / Cr.
Account Name
Debit / Dr.
Credit / Cr.
Chapter
3-23
Assets
Assets
Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-24
Liabilities
Liabilities
Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Chapter 3-*
Assets
Debit / Dr.

Credit / Cr.
Normal Balance
Chapter 3-*
Liabilities
Debit / Dr.
Credit / Cr.
Normal Balance
Chapter
3-25
Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Common Stock
Common Stock
Chapter
3-23
Dividends
Dividends
Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-25
Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Stockholders
Stockholders

’
’
Equity
Equity
Chapter
3-25
Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Retained Earnings
Retained Earnings
Chapter 3-*
Debit / Dr.
Credit / Cr.
Normal Balance
Retained Earnings
Chapter 3-*
Debit / Dr.
Credit / Cr.
Normal Balance
Common Stock
Chapter 3-*

Dividends
Debit / Dr.
Credit / Cr.
Normal Balance
Chapter 3-*
Debit / Dr.
Credit / Cr.
Normal Balance
Chapter
3-27
Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Expense
Expense
Chapter
3-26
Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Revenue
Revenue
Chapter 3-*

Debit / Dr.
Credit / Cr.
Normal Balance
Expense
Chapter 3-*
Debit / Dr.
Credit / Cr.
Normal Balance
Revenue
Chapter
3-23
Assets
Assets
Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-27
Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Expense
Expense
Chapter
3-24
Liabilities
Liabilities

Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-25
Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Stockholders
Stockholders
’
’
Equity
Equity
Chapter
3-26
Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Revenue
Revenue
Chapter 3-*
Debit / Dr.
Credit / Cr.
Normal Balance

Chapter 3-*
Debit / Dr.
Credit / Cr.
Normal Balance
Revenue
Chapter 3-*
Assets
Debit / Dr.
Credit / Cr.
Normal Balance
Chapter 3-*
Debit / Dr.
Credit / Cr.
Normal Balance
Expense
Chapter 3-*
Liabilities
Debit / Dr.

Credit / Cr.
Normal Balance
Account TitleRef.DebitCreditDate
Sheet1DateAccount TitleRef.DebitCredit
Cash
Acct. No. 101
ExplanationRef.DebitCreditBalanceDate
Account TitleRef.DebitCreditDate
Chart of AccountsChart of AccountsAcct.
No.Account100Cash105Accounts
receivable110Inventory130Building200Accounts
payable220Note payable300Common stock330Retained
earnings400Sales500Cost of goods sold
General LedgerGeneral JournalDateAccount
TitleRef.DebitCreditJan.3Cash100100,000Common
stock300100,00010Building130150,000Note
payable220150,00015Inventory11060,000Accounts
payable20060,00020Accounts
receivable10575,000Sales40075,00020Cost of goods
sold50030,000Inventory11030,00029Cash10040,000Accounts
receivable10540,000General LedgerCashAcct. No.
100DateExplanationRef.DebitCreditBalanceJan.3Sale of
common stockGJ100,000100,00020GJ40,000140,000Accounts
ReceivableAcct. No.
105DateExplanationRef.DebitCreditBalanceJan.20GJ75,00075,0
00GJ40,00035,000InventoryAcct. No.
0020GJ30,00030,000BuildingAcct. No.
130DateExplanationRef.DebitCreditBalanceJan.10GJ150,00015
0,000Accounts payableAcct. No.
200DateExplanationRef.DebitCreditBalanceJan.15GJ60,000(60,
000)Notes payableAcct. No.
220DateExplanationRef.DebitCreditBalanceJan.10GJ150,000(15
0,000)Common stockAcct. No.

300DateExplanationRef.DebitCreditBalanceJan.3Sale for
cashGJ100,000(100,000)Retained EarningsAcct. No.
330DateExplanationRef.DebitCreditBalance- 0SalesAcct. No.
400DateExplanationRef.DebitCreditBalanceJan.20GJ75,000(75,
000)Cost of Goods SoldAcct. No.
00
Trial BalanceTrial BalanceAcct.
No.AccountDebitCredit100Cash140,000105Accounts
receivable35,000110Inventory30,000130Building150,000200Ac
counts payable60,000220Note payable150,000300Common
stock100,000330Retained earnings400Sales75,000500Cost of
goods sold30,000385,000385,000
Journal EntryNo.AccountDebitCredit110,000
Sheet1 (2)DateAccount
TitleRef.DebitCreditJan.3Cash100100,000Common
stock300100,000CashAcct. No.
101DateExplanationRef.DebitCreditBalance
A Further Look at Financial
Statements
2
2-‹#›
Use ratios to evaluate a company’s profitability, liquidity, and
solvency.
CHAPTER OUTLINE

Identify the sections of a classified balance sheet.
1
2
LEARNING OBJECTIVES
Discuss financial reporting concepts.
3
2-‹#›
Presents a snapshot at a point in time.
To improve understanding, companies group similar assets and
similar liabilities together.
Standard Classifications
LEARNING OBJECTIVE
LO 1
Identify the sections of a classified balance sheet.
1
Assets Liabilities and Stockholders’ Equity
Current assets Current liabilities
Long-term investments Long-term liabilities
Property, plant, and equipment Stockholders’ equity
Intangible assets
ILLUSTRATION 2-1
Standard balance sheet classifications
2-‹#›
LO 1
ILLUSTRATION 2-2

Classified balance sheet
2-‹#›
LO 1
ILLUSTRATION 2-2
Classified balance sheet
2-‹#›
Assets that a company expects to convert to cash or use up
within one year or the operating cycle, whichever is longer.
Operating cycle is the average time it takes from the purchase
of inventory, to the sale of goods, and then to the collection of
cash from customers.
Common types of current assets are (1) cash, (2) investments,
(3) receivables, (4) inventories, and (5) prepaid expenses.
Current Assets
THE CLASSIFIED BALANCE SHEET
LO 1
2-‹#›
Companies list current asset accounts in the order they expect to
convert them into cash.
Illustration 2-3

Current assets section
Current Assets
LO 1
2-‹#›
Cash, and other resources that are reasonably expected to be
realized in cash or sold or consumed in the business within one
year or the operating cycle, are called:
Current assets.
Intangible assets.
Long-term investments.
Property, plant, and equipment.
Review Question
LO 1
2-‹#›
LO 1
Investments in stocks and bonds of other corporations that are
held for more than one year.
Long-term assets such as land or buildings that a company is
not currently using in its operating activities.
Long-term notes receivable.
Long-Term Investments

ILLUSTRATION 2-4
Long-term investments section
2-‹#›
Property, Plant, and Equipment
Long useful lives.
Currently used in operations.
Includes land, buildings, equipment, delivery vehicles, and
furniture.
Depreciation - allocating the cost of assets to a number of years.
Accumulated depreciation - total amount of depreciation
expensed thus far in the asset’s life.
Alternative Terminology
Property, plant, and equipment is sometimes called fixed assets
or plant assets.
LO 1
2-‹#›
Property, Plant, and Equipment
ILLUSTRATION 2-5
Property, plant, and equipment section
LO 1

2-‹#›
Intangible Assets
Assets that do not have physical substance.
Includes goodwill, patents, copyrights, and trademarks or trade
names.
▼Helpful Hint Sometimes intangible assets are reported
under a broader heading called “Other assets.”
LO 1
2-‹#›
Intangible Assets
Illustration 2-6
ILLUSTRATION 2-6
Intangible assets section
LO 1
2-‹#›
Review Question
Patents and copyrights are
Current assets.
Intangible assets.
Long-term investments.

Property, plant, and equipment.
LO 1
2-‹#›
Assets Section of Classified Balance Sheet
Baxter Hoffman recently received the following information
related to Hoffman Corporation’s December 31, 2017, balance
sheet.
Prepaid insurance $ 2,300 Inventory $3,400
Cash 800 Accumulated depreciation—
Equipment 10,700 equipment 2,700
Accounts receivable 1,100
Prepare the assets section of Hoffman Corporation’s classified
balance sheet.
DO IT!
1a
LO 1
2-‹#›
Prepare the assets section of the classified balance sheet.
Prepaid insurance $ 2,300 Inventory $3,400

Cash 800 Accumulated depreciation—
Equipment 10,700 equipment 2,700
Accounts receivable 1,100
2-‹#›
Obligations the company is to pay within the next year or
operating cycle, whichever is longer.
Common examples are accounts payable, salaries and wages
payable, notes payable, interest payable, and income taxes
payable.
Also included as current liabilities are current maturities of
long-term obligations—payments to be made within the next
year on long-term obligations.
Current Liabilities
LO 1
2-‹#›
Current Liabilities

ILLUSTRATION 2-7
Current liabilities section
LO 1
2-‹#›
Obligations a company expects to pay after one year.
Include bonds payable, mortgages payable, long-term notes
payable, lease liabilities, and pension liabilities.
Long-Term Liabilities
ILLUSTRATION 2-8
Long-term liabilities section
LO 1
2-‹#›
Review Question
Which of the following is not a long-term liability?
Bonds payable.
Current maturities of long-term debt.
Long-term notes payable.
Mortgages payable.
LO 1
2-‹#›

Illustration 2-2
Common stock - investments of assets into the business by the
stockholders.
Retained earnings - income retained for use in the business
Stockholders’ Equity section for Franklin Corporation
LO 1
2-‹#›
CL Salaries and wages payable LTI Investment in real estate
NA Service revenue PPEEquipment
CL Interest payable PPE Accumulated depreciation
IA GoodwillCA Debt investments (short-term)
NA Depreciation expenseSE Retained earnings
LTL Mortgage payable CL Unearned service revenue
(due in 3 years)
Match each of the items to its proper balance sheet
classification, shown below. If the item would not appear on a
balance sheet, use “NA.”
Current assets (CA) Current liabilities (CL)
Long-term investments (LTI) Long-term liabilities (LTL)
Property, plant, and equipment (PPE) Stockholders’ equity (SE)
Intangible assets (IA)

Solution
LO 1
Balance Sheet Classifications
DO IT!
1b
2-‹#›

Ratio Analysis
Ratio analysis expresses the relationship among selected items
of financial statement data.
A ratio expresses the mathematical relationship between one
quantity and another.
A single ratio by itself is not very meaningful.
LEARNING OBJECTIVE
LO 2
Use ratios to evaluate a company’s profitability, liquidity, and
solvency.
2
2-‹#›
ILLUSTRATION 2-9
Financial ratio classifications
RATIO ANALYSIS

LO 2
2-‹#›
Illustration 2-10
USING THE INCOME STATEMENT
ILLUSTRATION 2-10
Best Buy’s income statement
LO 2
2-‹#›
Illustration: Earnings per share (EPS) measures the net income
earned on each share of common stock.
Earnings per Share
Profitability Ratio

LO 2
2-‹#›
For 2017 Stoneland Corporation reported net income $26,000;
net sales $400,000; and average shares outstanding 6,000. There
were preferred stock dividends of $2,000. What was the 2017
earnings per share?
$4.00
$0.06
$16.67
$66.67
$26,000
- $2,000
6,000

= $4.00
Review Question
USING THE INCOME STATEMENT
LO 2
2-‹#›
Illustration 2-12
Best Buy’s balance sheet
USING A CLASSIFIED BALANCE SHEET
2-‹#›
Liquidity—the ability to pay obligations expected to become
due within the next year or operating cycle.
Working capital is the difference between the amounts of

current assets and current liabilities.
Best Buy had working capital in 2014 of $3,049 million
($10,485 million − $7,436 million).
ILLUSTRATION 2-13
Working capital
LO 2
2-‹#›
Liquidity ratios measure the short-term ability to pay maturing
obligations and to meet unexpected needs for cash.
For every dollar of current liabilities, Best Buy has $1.41 of
current assets.
ILLUSTRATION 2-14
Current ratio
LO 2
2014

2-‹#›
Can a Company Be Too Liquid?
There actually is a point where a company can be too liquid—
that is, it can have too much working capital. While it is
important to be liquid enough to be able to pay short-term bills
as they come due, a company does not want to tie up its cash in
extra inventory or receivables that are not earning the company
money. By one estimate from the REL Consultancy Group, the
thousand largest U.S. companies had cumulative excess working
capital of $1.017 trillion in a recent year. This was an 18%
increase, which REL said represented a“ deterioration in the
management of operations.” Given that managers throughout a
company are interested in improving profitability, it is clear
that they should have an eye toward managing working capital.
They need to aim for a “Goldilocks solution”—not too much,
not too little, but just right.
Source: Maxwell Murphy, “The Big Number,” Wall Street
Journal (November 9, 2011).
LO 2

2-‹#›
Solvency—the ability to pay interest as it comes due and to
repay the balance of a debt due at its maturity.
Solvency ratios measure the ability of the company to survive
over a long period of time.
▼Helpful Hint Some users evaluate solvency using a ratio of
liabilities divided by stockholders’ equity. The higher this “debt
to equity” ratio, the lower is a company’s solvency.
LO 2
2-‹#›
The 2014 ratio means that every dollar of assets was financed
by 72 cents of debt.
Debt to assets ratio measures the percentage of total financing
provided by creditors rather than stockholders.

ILLUSTRATION 2-15
Debt to assets ratio
LO 2
2-‹#›
INVESTOR INSIGHT
When Debt Is Good
Debt financing differs greatly across industries and companies.
Here are some debt to assets ratios for selected companies in a
recent year:
Debt to
Assets Ratio
Google 23%
Nike 41%
Microsoft 48%
ExxonMobil 48%
General Motors 74%
LO 2
2-‹#›

In the Statement of Cash Flows, cash provided by operating
activities fails to take into account that a company must invest
in new property, plant, and equipment and must maintain
dividends at current levels to satisfy investors.
Free cash flow describes the net cash provided by operating
activities after adjusting for capital expenditures and dividends
paid.
USING THE STATEMENT OF CASH FLOWS
ILLUSTRATION 2-16
Free cash flow
LO 2
2-‹#›
Illustration: MPC produced and sold 10,000 personal computers
this year. It reported $100,000 cash provided by operating
activities. In order to maintain production at 10,000 computers,
MPC invested $15,000 in equipment. It chose to pay $5,000 in
dividends. Calculate free cash flow.

Cash provided by operating activities $100,000
Less: Expenditures on property, plant, and equipment -15,000
Dividends paid 5,000
Free cash flow $ 80,000
USING THE STATEMENT OF CASH FLOWS
LO 2
2-‹#›
Ratio Analysis
The following information is available for Ozone Inc.
2017 2016
Current assets $ 88,000 $ 60,800
Total assets 400,000 341,000
Current liabilities 40,000 38,000
Total liabilities 120,000 150,000
Net income 100,000 50,000
Net cash provided by operating activities 110,000 70,000

Preferred dividends 10,000 10,000
Common dividends 5,000 2,500
Expenditures on PP&E45,000 20,000
Shares outstanding at beginning of year 60,000 40,000
Shares outstanding at end of year 120,000 60,000
DO IT!
2
LO 2
2-‹#›
Ratio Analysis
(a) Compute earnings per share for 2017 and 2016 for Ozone.
Ozone’s primary competitor, Frost Corporation, had earnings
per share of $2 in 2017.
DO IT!
2
SOLUTION

Earnings per
share
LO 2
2-‹#›
Ratio Analysis
Compute the current ratio and debt to assets ratio for 2017.
DO IT!
2
SOLUTION

Current
Ratio
Debt to Assets ratio
LO 2
2-‹#›
Net cash provided by operating
activities$110,000$70,000
Expenditures on PP&E− 45,000 − 20,000
Preferred dividend − 10,000 − 10,000
Common dividends − 5,000 − 2,500
$ 50,000$ 37,500
Ratio Analysis

Compute free cash flow for each year.
DO IT!
2
SOLUTION
2017
2016
LO 2
2-‹#›
The Standard-Setting Environment
Generally Accepted Accounting Principles (GAAP) - A set of
rules and practices, having substantial authoritative support,
that the accounting profession recognizes as a general guide for
financial reporting purposes.
Standard-setting bodies determine these guidelines:
Securities and Exchange Commission (SEC)
Financial Accounting Standards Board (FASB)
International Accounting Standards Board (IASB)
Public Company Accounting Oversight Board (PCAOB)

International Note Over 115 countries use international
standards (called IFRS).
LEARNING OBJECTIVE
LO 3
Discuss financial reporting concepts.
3
2-‹#›
Generally accepted accounting principles are:
a set of standards and rules that are recognized as a general
guide for financial reporting.
usually established by the Internal Revenue Service.
the guidelines used to resolve ethical dilemmas.
fundamental truths that can be derived from the laws of nature.
Review Question
THE STANDARD-SETTING ENVIRONMENT
LO 3

2-‹#›
INTERNATIONAL INSIGHT
The Korean Discount
If you think that accounting standards don’t matter, consider
recent events in South Korea. For many years, international
investors complained that the financial reports of South Korean
companies were inadequate and inaccurate. Accounting
practices there often resulted in huge differences between stated
revenues and actual revenues. Because investors did not have
faith in the accuracy of the numbers, they were unwilling to pay
as much for the shares of these companies relative to shares of
comparable companies in different countries. This difference in
share price was often referred to as the “Korean discount.” In
response, Korean regulators decided that companies would have
to comply with international accounting standards. This change
was motivated by a desire to “make the country’s businesses
more transparent” in order to build investor confidence and spur
economic growth. Many other Asian countries, including China,
India, Japan, and Hong Kong, have also decided either to adopt
international standards or to create standards that are based on
the international standards.
Source: Evan Ramstad, “End to ‘Korea Discount’?” Wall Street

Journal (March 16, 2007).
LO 3
2-‹#›
According to the FASB, useful information should possess two
fundamental qualities, relevance and faithful representation.
Relevance Accounting information has relevance if it would
make a difference in a business decision. Information is
considered relevant if it provides information that has
predictive value, that is, helps provide accurate expectations
about the future, and has confirmatory value, that is, confirms
or corrects prior expectations. Materiality is a company-specific
aspect of relevance. An item is material when its size makes it
likely to influence the decision of an investor or creditor.
QUALITIES OF USEFUL INFORMATION
LO 3
2-‹#›

According to the FASB, useful information should possess two
fundamental qualities, relevance and faithful representation.
Faithful Representation Faithful representation means that
information accurately depicts what really happened. To provide
a faithful representation, information must be complete (nothing
important has been omitted), neutral (is not biased toward one
position or another), and free from error.
LO 3
2-‹#›
Enhancing Qualities
Comparability results when different companies use the same
accounting principles.
Consistency means that a company uses the same accounting
principles and methods from year to year.
Information is verifiable if independent
observers, using the same methods, obtain similar results.
For accounting information to have relevance, it must be timely.
Information has the quality of understandability

if it is presented in a clear and concise fashion.
LO 3
2-‹#›
What Do These Companies Have in Common?
Another issue related to comparability is the accounting time
period. An accounting period that is one-year long is called a
fiscal year. But a fiscal year need not match the calendar year.
For example, a company could end its fiscal year on April 30
rather than on December 31. Why do companies choose the
particular year-ends that they do? For example, why doesn’t
every company use December 31 as its accounting year-end?
Many companies choose to end their accounting year when
inventory or operations are at a low point. This is advantageous
because compiling accounting information requires much time
and effort by managers, so they would rather do it when they
aren’t as busy operating the business. Also, inventory is easier
and less costly to count when its volume is low. Some
companies whose year-ends differ from December 31 are Delta

Air Lines, June 30; The Walt Disney Company, September 30;
and Dunkin’ Donuts, Inc., October 31. In the notes to its
financial statements, Best Buy states that its accounting year-
end is the Saturday nearest the end of January.
LO 3
2-‹#›
Monetary Unit
Economic Entity
Requires that only those things that can be expressed in money
are included in the accounting records.
States that every economic entity can be separately identified
and accounted for.
ASSUMPTIONS IN FINANCIAL REPORTING
ILLUSTRATION 2-19
Key assumptions in financial reporting
LO 3

2-‹#›
Going Concern
The business will remain in operation for the foreseeable future.
Periodicity
States that the life of a business can be divided into artificial
time periods.
ASSUMPTIONS IN FINANCIAL REPORTING
LO 3
2-‹#›
Measurement Principles
Historical Cost
Or cost principle, dictates that companies record assets at their

cost.
PRINCIPLES IN FINANCIAL REPORTING
Fair Value
Indicates that assets and liabilities should be reported at fair
value (the price received to sell an asset or settle a liability).
Full Disclosure Principle
Requires that companies disclose all circumstances and events
that would make a difference to financial statement users.
LO 3
2-‹#›
Cost Constraint
Accounting standard-setters weigh the cost that companies will
incur to provide the information against the benefit that
financial statement users will gain from having the information
available.

PRINCIPLES IN FINANCIAL REPORTING
LO 3
2-‹#›
Comparability
Going concern
Materiality
The following items guide the FASB when it creates accounting
standards.
RelevancePeriodicity assumption
Faithful representation Going concern assumption
Comparability Historical cost principle
Consistency Full disclosure principle
Monetary unit assumption Materiality
Economic entity assumption
Match each item above with a description below.
Ability to easily evaluate one company’s results relative to
another’s.
Belief that a company will continue to operate for the

foreseeable future.
The judgment concerning whether an item is large enough to
matter to decision-makers.
Financial Accounting Concepts and Principles
DO IT!
3
LO 3
2-‹#›
standards.

DO IT!
3
Full disclosure
Periodicity
Relevance
The reporting of all information that would make a difference to
financial statement users.
The practice of preparing financial statements at regular
intervals.
The quality of information that indicates the information makes
a difference in a decision.
LO 3
2-‹#›
standards.

DO IT!
3
Historical cost
Consistency
Economic entity
Belief that items should be reported on the balance sheet at the
price that was paid to acquire the item.
A company’s use of the same accounting principles and methods
from year to year.
Tracing accounting events to particular companies.
LO 3
2-‹#›

standards.
DO IT!
3
Faithful representation
Monetary unit
The desire to minimize errors and bias in financial statements.
Reporting only those things that can be measured in dollars.
LO 3
2-‹#›
What is the primary criterion by which accounting information
can be judged?

Consistency.
Predictive value.
Usefulness for decision making.
Comparability.
Review Question
THE STANDARD-SETTING ENVIRONMENT
LO 3
2-‹#›
KEY POINTS
A Look at IFRS
LEARNING OBJECTIVE
Compare the classified balance sheet format under GAAP and
IFRS.

4
Similarities
IFRS generally requires a classified statement of financial
position similar to the classified balance sheet under GAAP.
IFRS follows the same guidelines as this textbook for
distinguishing between current and noncurrent assets and
liabilities.
LO 4
2-‹#›
A Look at IFRS
KEY POINTS
Differences
IFRS recommends but does not require the use of the title
“statement of financial position” rather than balance sheet.
The format of statement of financial position information is
often presented differently under IFRS. Although no specific
format is required, many companies that follow IFRS present

statement of financial position information in this order:
Non-current assets
Current assets
Equity
Non-current liabilities
Current liabilities
LO 4
2-‹#›
A Look at IFRS
KEY POINTS
Differences
Under IFRS, current assets are usually listed in the reverse
order of liquidity. For example, under GAAP cash is listed first,
but under IFRS it is listed last.
IFRS has many differences in terminology from what are shown
in your textbook.
Both GAAP and IFRS are increasing the use of fair value to

report assets. However, at this point IFRS has adopted it more
broadly. As examples, under IFRS companies can apply fair
value to property, plant, and equipment, and in some cases
intangible assets.
LO 4
2-‹#›
A Look at IFRS
The IASB and the FASB are working on a project to converge
their standards related to financial statement presentation. A
key feature of the proposed framework is that each of the
statements will be organized in the same format, to separate an
entity’s financing activities from its operating and investing
activities and, further, to separate financing activities into
transactions with owners and creditors. Thus, the same
classifications used in the statement of financial position would
also be used in the income statement and the statement of cash

flows. The project has three phases. You can follow the joint
financial presentation project at the following link:
http://ww.fasb.org/project/-
financial_statement_presentation.shtml.
LO 4
2-‹#›
IFRS Practice
A company has purchased a tract of land and expects to build a
production plant on the land in approximately 5 years. During
the 5 years before construction, the land will be idle. Under
IFRS, the land should be reported as:
land expense.
property, plant, and equipment.
an intangible asset.
a long-term investment.
A Look at IFRS

LO 4
2-‹#›
IFRS Practice
Current assets under IFRS are listed generally:
by importance.
in the reverse order of their expected conversion to cash.
by longevity.
alphabetically.
A Look at IFRS
LO 4
2-‹#›

IFRS Practice
Companies that use IFRS:
may report all their assets on the statement of financial position
at fair value.
may offset assets against liabilities and show net assets and net
liabilities on their statements of financial position, rather than
the underlying detailed line items.
may report non-current assets before current assets on the
statement of financial position.
do not have any guidelines as to what should be reported on the
statement of financial position.
A Look at IFRS
LO 4
2-‹#›

COPYRIGHT
2-‹#›
Introduction to Financial
Statements
1
1-‹#›

CHAPTER OUTLINE
Identify the forms of business organization and the uses of
accounting information.
1
Explain the three principal types of business activity.
2
LEARNING OBJECTIVES
Describe the four financial statements and how they are
prepared.
3
1-‹#›
LEARNING OBJECTIVE
LO 1
FORMS OF BUSINESS ORGANIZATION

Identify the forms of business organization and the uses of
accounting information.
1
1-‹#›
USERS AND USES OF FINANCIAL INFORMATION
Internal Users
Illustration 1-1
Questions that internal users ask
LO 1
1-‹#›

Owning a Piece of the Bar
The original Clif Bar® energy bar was created in 1990 after six
months of experimentation by Gary Erickson and his mother in
her kitchen. Today, the company has almost 300 employees and
is considered one of the leading Landor’s Breakaway Brands®.
One of Clif Bar & Company’s proudest moments was the
creation of an employee stock ownership plan (ESOP) in 2010.
This plan gives its employees 20% ownership of the company.
The ESOP also resulted in Clif Bar enacting an open-book
management program, including the commitment to educate all
employee-owners about its finances. Armed with basic
accounting knowledge, employees are more aware of the
financial impact of their actions, which leads to better
decisions.
LO 1
1-‹#›
External Users
Illustration 1-2
Questions that external users ask

LO 1
1-‹#›
Spinning the Career Wheel
How will the study of accounting help you? A working
knowledge of accounting is desirable for virtually every field of
business. Some examples of how accounting is used in business
careers include the following.
General management: Managers of Ford Motors, Massachusetts
General Hospital, California State University–Fullerton, a
McDonald’s franchise, and a Trek bike shop all need to
understand accounting data in order to make wise business
decisions.
Marketing: Marketing specialists at Procter & Gamble must be
sensitive to costs and benefits, which accounting helps them
quantify and understand. Making a sale is meaningless unless it
is a profitable sale.
LO 1

1-‹#›
Spinning the Career Wheel
Finance: Do you want to be a banker for Citicorp, an investment
analyst for Goldman Sachs, or a stock broker for Merrill Lynch?
These fields rely heavily on accounting knowledge to analyze
financial statements. In fact, it is difficult to get a good job in a
finance function without two or three courses in accounting.
Real estate: Are you interested in being a real estate broker for
Prudential Real Estate? Because a third party—the bank—is
almost always involved in financing a real estate transaction,
brokers must understand the numbers involved: Can the buyer
afford to make the payments to the bank? Does the cash flow
from an industrial property justify the purchase price? What are
the tax benefits of the purchase?
LO 1
1-‹#›

Ethics In Financial Reporting
United States regulators and lawmakers were very concerned
that the economy would suffer if investors lost confidence in
corporate accounting because of unethical financial reporting.
Recent financial scandals include: Enron, WorldCom,
HealthSouth, AIG, and others.
Congress passed Sarbanes-Oxley Act (SOX).
Effective financial reporting depends on sound ethical behavior.
LO 1
1-‹#›
Illustration 1-3
Steps in analyzing ethics cases
LO 1
1-‹#›

LO 1
ETHICS INSIGHT
I Felt the Pressure—Would You?
“I felt the pressure.” That’s what some of the employees of the
now-defunct law firm of Dewey & LeBoeuf LLP indicated when
they helped to overstate revenue and use accounting tricks to
hide losses and cover up cash shortages. These employees
worked for the former finance director and former chief
financial officer (CFO) of the firm. Here are some of their
comments:
• “I was instructed by the CFO to create invoices, knowing they
would not be sent to clients. When I created these invoices, I
knew that it was inappropriate.”
• “I intentionally gave the auditors incorrect information in the
course of the audit.”
Dewey & LeBoeuf LLP
(continued)
1-‹#›

ETHICS INSIGHT
I Felt the Pressure—Would You?
What happened here is that a small group of lower-level
employees over a period of years carried out the instructions of
their bosses. Their bosses, however, seemed to have no concern
as evidenced by various e-mails with one another in which they
referred to their financial manipulations as accounting tricks,
cooking the books, and fake income.
Source: Ashby Jones, “Guilty Pleas of Dewey Staff Detail the
Alleged Fraud,” Wall Street Journal (March 28, 2014).
Dewey & LeBoeuf LLP
LO 1
1-‹#›
In choosing the organizational form for your outdoor guide
service, you should consider the pros and cons of each. Identify
each of the following organizational characteristics with the
organizational form or forms with which it is associated.
Corporation.
Sole proprietorship and partnership.

Corporation.
SOLUTION
DO IT!
Business Organization Forms
1
1. Easier to raise funds.4. Tax advantages.
2. Simple to establish.5. Easier to transfer ownership.
3. No personal legal liability.
Sole proprietorship and partnership.
Corporation.
LO 1
1-‹#›
Review Question
Which of the following did not result from the Sarbanes-Oxley
Act?
Top management must now certify the accuracy of financial
information.
Penalties for fraudulent activity increased.

Independence of auditors increased.
Tax rates on corporations increased.
LO 1
1-‹#›
LEARNING OBJECTIVE
Explain the three principal types of business activity.
2
All businesses are involved in three types of activity —
financing,
investing, and
operating.
The accounting information system keeps track of the results of
each of these business activities.
LO 2
1-‹#›

FINANCING ACTIVITIES
Two primary sources of outside funds are:
Borrowing money (debt)
Amounts owed are called liabilities.
Party to whom amounts are owed are creditors.
Notes payable and bonds payable are different types of
liabilities.
Issuing (selling) shares of stock for cash (equity).
Common stock is the term used to describe the amount paid by
stockholders for shares they purchase.
Payments to stockholders are called dividends.
LO 2
1-‹#›
INVESTING ACTIVITIES
Purchase of resources a company needs to operate.
Computers, delivery trucks, furniture, buildings.
Resources owned by a business are called assets.

Investments are another example of an investing activity.
LO 2
1-‹#›
OPERATING ACTIVITIES
Once a business has the assets it needs, it can begin its
operations.
Revenues - Amounts earned from the sale of products and other
sources (sales revenue, service revenue, and interest revenue).
Inventory - Goods available for sale
to customers.
Accounts receivable - Right to receive
money from a customer as the
result of a sale.
LO 2
1-‹#›

OPERATING ACTIVITIES
Once a business has the assets it needs, it can begin its
operations.
Expenses - cost of assets consumed or services used. (cost of
goods sold, selling, marketing, administrative, interest, and
income taxes expense).
Liabilities arising from expenses include accounts payable,
interest payable, wages payable, sales taxes payable, and
income taxes payable.
Net income – when revenues exceed expenses.
Net loss – when expenses exceed revenues.
LO 2
1-‹#›
Classify each item as an asset, liability, common stock, revenue,
or expense.
Cost of renting property.
Truck purchased.

Notes payable.
Issuance of ownership shares.
Amount earned from providing service.
Amounts owed to suppliers.
Expense.
Asset.
Liabilities.
Common stock.
Revenue.
Liabilities.
SOLUTION
DO IT!
Business Activities
2
LO 2
1-‹#›
LEARNING OBJECTIVE
LO 3

NUR204 Week 7 Assignment Page 1 ` Assi.docx

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